Starting a business is an exciting venture that promises new challenges and opportunities. However, it's crucial to understand the foundational requirements and decisions that need to be made early on, such as the business structure and the role of an accountant in your new enterprise. In this blog post, we'll explore the key considerations when starting a business, focusing on the choice between setting up as a limited company or operating as an unincorporated entity, and the value an accountant brings to the table.
Key Requirements When Starting a Business
Business Plan: Your roadmap for business success, detailing your vision, mission, target market, competitive landscape, and financial projections.
Legal Structure: Deciding whether to operate as a sole trader, partnership, limited company, or another structure affects your liability, tax, and reporting requirements.
Registration: Depending on your chosen structure, you may need to register your business with Companies House, HM Revenue & Customs (HMRC), or both.
Bank Account: A business bank account separates your personal and business finances, simplifying accounting and tax processes.
Licenses and Permits: Depending on your business type and location, you may need specific licenses or permits to operate legally.
Insurance: Consider what types of business insurance (e.g., liability, property, professional indemnity) you need to protect your business.
Limited Company vs. Unincorporated Business: Benefits and Drawbacks
Limited Company
Benefits:
Limited Liability: Shareholders' personal assets are protected; financial liability is limited to their investment in the company.
Tax Efficiency: Limited companies may benefit from lower corporation tax rates and can structure directors' remuneration to optimize tax liabilities.
Professional Image: Operating as a limited company can enhance your business's credibility with clients, suppliers, and financial institutions.
Drawbacks:
Complexity and Cost: Incorporating and managing a limited company involves more regulatory requirements, such as annual accounts submission and corporation tax returns, leading to higher administrative costs.
Public Disclosure: Limited companies must publicly disclose certain information, including director details and financial statements, which some may prefer to keep private.
Unincorporated Business (Sole Trader or Partnership)
Benefits:
Simplicity: Easier to set up and manage, with fewer registration and ongoing administrative requirements than a limited company.
Control: Sole traders and partners have full control over their business decisions without the need to report to shareholders.
Privacy: Financial affairs and profits are private, unlike the public disclosure requirements for limited companies.
Drawbacks:
Unlimited Liability: Personal assets are not protected in the event of business failure; sole traders and partners are personally liable for business debts.
Taxation: Higher tax rates may apply as profits increase, and there are fewer opportunities for tax planning compared to a limited company.
Keeping records
If your company is small, then you might be able to get away with producing annual accounts manually. If you have more than 500-600 transactions in a year it is recommended to consider bookkeeping software. The three big providers in the UK are Sage, QuickBooks, and Xero. My advice to anyone would be to run for the hills if they are considering Sage.
To keep it brief, Xero has more integration compatibility with partners and banks, it is generally capable of keeping the books better for medium-size entities and is preferred by myself, whereas QuickBooks is better for smaller companies and has a more friendly user interface with better support service. In terms of price, at the time of writing, they both start at approximately £10 per month going up to £42, depending on the pricing tier, though both usually offer generous introductory offers to try and entice you onto their platform.
Should I set up a business bank account?
In my opinion, you should always set up a business bank account whether you are incorporated or not. As long as you are a UK resident this should be quick and easy, and in many cases, new businesses are given breaks on bank charges. This separation of business and personal makes it easier to reconcile business transactions for yourself or your accountant.
The Role of an Accountant
An accountant is invaluable when starting your business, offering expertise in areas critical for early success:
Choosing the Right Structure: An accountant can advise on the most suitable business structure based on your goals, financial situation, and growth plans.
Tax Planning and Compliance: They ensure you're aware of tax obligations, potential savings, and deadlines, helping you navigate complex tax regulations.
Financial Forecasting and Planning: Accountants assist in creating realistic financial forecasts, essential for securing funding and managing cash flow effectively.
Regulatory and Reporting Requirements: They guide you through the necessary legal and financial reporting, ensuring compliance and avoiding penalties.
Overview
Starting a business involves numerous considerations, from choosing the right structure to understanding your financial and legal obligations. A limited company offers benefits like limited liability and tax efficiency but comes with greater complexity and public disclosure requirements. Conversely, unincorporated businesses are simpler to operate and maintain privacy but lack the protection of limited liability and tax benefits. Engaging an accountant from the outset provides expertise in financial planning, tax, and compliance, laying a solid foundation for your business's success and growth.